Madoff Victims to Get $1.45 Billion After Trustee’s Victory

Victims of Bernard Madoff’s Ponzi scheme will soon be receiving an additional $1.45 billion distribution, the fruits of an appeals court victory by the trustee unwinding the convicted swindler’s investment firm.

Several customers appealed directly to the Manhattan-based U.S. Court of Appeals for the Second Circuit court from a decision by a bankruptcy judge that they weren’t entitled to an adjustment of their claims reflecting how long they invested money with Madoff. Had those customers prevailed, long-time investors would have larger claims, at the expense of short-term victims.

In an opinion Friday for the three-judge appellate panel, U.S. Circuit Judge Chester J. Straub said an “inflation adjustment” isn’t permitted by the Securities Investor Protection Act, which governs the liquidation of investment firms. He said that the provision in the statute that defines a customer claim “makes no mention of inflation.”

Straub also said SIPA is designed for a “proportional distribution” and isn’t intended “to restore to customers the value of the property they originally invested.”

The circuit court refused to give any deference to the views of the Securities and Exchange Commission, which had argued in bankruptcy court that some inflation adjustment was required.

‘Novel’ Views

Straub called the SEC’s views “novel, inconsistent with its position in other cases, and ultimately unpersuasive.”

The Madoff trustee, Irving Picard, said he will immediately file an application allowing a distribution of the $1.45 billion that was held back pending the outcome the appeal. Only an attempted further appeal by the customers to the U.S. Supreme Court could delay the distribution, Picard’s spokeswoman, Amanda Remus, said in the e-mailed statement.

Should they turn to the high court, Picard might not be able to make the distribution until October, which could be when the justices would rule whether to permit an appeal. Since there’s no contrary circuit court opinion on the issue, the chances of an appeal are slim, because the Supreme Court is prone to taking cases over which the lower courts are split.

The Friday opinion was based in part on a decision from the same appeals court in August 2011. In that case, the appeals court said that fictitious account statements issued to Madoff customers must be disregarded in calculating claims, because the firm bought no securities on their behalf.

Correctly Calculated

The appeals court ruled that claims are correctly calculated based on cash invested less cash taken out, disregarding fictitious profit listed on account statements.

Madoff victims’ losses exceeded $17 billion, not counting profits they thought they had earned. Picard so far has taken in $10.55 billion and distributed $7.2 billion from his recoveries. In addition, the Securities Investor Protection Corp. advanced $823.7 million, which also has been handed out.

Picard is holding back $3.8 billion for issues still on appeal and in litigation, including the $1.45 billion for the question decided this week.

The appeal is 2427 Parent Corp v. Picard, 14-97, U.S. Court of Appeals for the Second Circuit (Manhattan). The Madoff liquidation is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC, 08-01789, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Before it's here, it's on the Bloomberg Terminal.